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Sunday, June 24, 2007

The Week Ahead

This is going to be a heavy week for economic data: US Economic Calendar for next week. The data sifting will be going on as Fed policy makers meet Wednesday and Thursday. The Fed certainly has lots to be worried about as the housing market takes another dive as gauged by the recent slide in the ABX indices and the troubles with two Bear Stearns hedge funds. I remain in the camp that believes yields have been rising as systemic risk is further priced in and inflation continues to run rampant due to the intense amount of money creation as gauged by shadow-M3 figures. Those countervailing forces (especially the illusion that the economy is rebounding and that Bernanke is some sort hero ROTFLMAO) will enable the Fed to stand pat again.

Investors will continue to watch for developments on the Bear Stearns front. I suspect that lots of work has been going on over the weekend to try to sweep this under the rug. If all goes according to plan the talking point for the week should be, "CDO problem? What CDO problem?? There was a CDO problem??? LOL, don't be silly..." and all should be well with the market resuming at upward trajectory. Or will it? If enough folks were paying attention last week to the reality that a whole lot of that tainted paper is only worth 10-cents on the dollar, then the curtailed Merrill sale of Bear collateral could be just enough to turn the tide away from 'buy first and ask questions later'.

The weekly S&P chart, at least from my half blind perspective (left eyesight a goner because of retinopathy), has the lower high, lower low look complete with the bearish engulfments that we saw last summer as the market struggled with a rising bond yield problem. In many respects it is amazing to realize just how far the stock market has come in a year, how risky credit derivatives have also become and yet the stock market has had this uncanny ability to hold above S&P 1500 and not get caught in the whirlwind of selling that occurred last summer under far less harsher conditions.

I am continuing to keep an eye on ABX and also relative strength, which as the chart shows, has fallen even as the market has remained range bound between 1500 and 1540. A weekly RSI break below 50 will surely be a big event, since 50 proved important support in the late Feb/March swoon. It's getting closer now at the 58 level. A further break below the 10 week moving average might also be pretty important as well. Yep, I've got that bearish feeling again. It may go away quickly IF I'm making too big a deal about CDO chicanery, in which case earnings season in July could prove the next upward catalyst.

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